Senate Republicans joined Democrats voting 68-to-22 to close debate on the Puerto Rico Oversight, Management, and Economic Stability Act, which creates a control board to handle the island government’s default and restructuring of its $74 billion in various classes and tranches of bonds.
“While there are many things we may not like about this compromise bill at the end of the day, this legislation provides the tools to allow Puerto Rico to restructure a meaningful portion of its debt. I wish we had something better,” said Senate Minority Leader Harry Reid (D.-Nev.).
In Senate rules, motions must clear a two-step process. First, senators vote to close debate, which requires 60 votes. Then, once debate is closed the motion passes if it reaches a simple majority. The vote for cloture is often a test of the motion’s support, but there are always reasons for senators who voted to close debate to switch sides on the vote for passage.
The PROMESA bill was negotiated in the lower chamber by Speaker Paul D. Ryan (R.-Wis.) with Treasury Secretary Jack Lew and former Obama White House advisor James Millstein, whose lobbying firm Millstein and Company was hired by the Puerto Rico’s Gov. Alejandro García Padilla.
Puerto Rico’s Government Development Bank missed a $422 million payment May 2. The island, styled as a commonwealth, is a non-sovereign territory of the United States. It passed a law that blocks all of its government agencies and departments from making any more debt payments until Congress restructured its debt down. There are $2 billion in payments due July 1, including $800 million due from the commonwealth government and $400 million due from the commonwealth-owned Puerto Rico Electric Power company. The power company has $26 billion in bond debt.
Reid said he was not pleased with the Puerto Rico default bill, but he was voting for it because it creates a bankruptcy mechanism that will relieve the island from repaying the full amount it owes.
“If Democrats had written this bill, it would be very different than what we are voting on today. I’m going to vote for passage of this bill because we must help Puerto Rico before July 1. Otherwise, we turn all the American citizens in Puerto Rico over to the hedge funds and they’ll sue them to death and that’s too bad. We must do something now,” he said. “Puerto Rico needs a workable debt restructuring process.”
Many of the bonds, exempt from state, local and federal taxes, are held by hedge funds, who have been seeking court protection from default.
The Puerto Rican government had passed a local law, with which it sought bankruptcy treatment as a city or town, but that was thwarted by the Supreme Court because federal law excluded the territory from Chapter 9 of the federal bankruptcy code dealing with government entities.
In the PROMESA bill, members of each specific bond group will vote on whether to accept the commonwealth’s restructuring offer–a vote that is binding on every member. However inside the PROMESA bill, there are mechanisms for the control board to override a vote to reject an offer in order to force the bondholders to accept the offer.